The market plunge we saw two weeks ago was the worst we’ve seen since the 2008 financial crisis. Despite the rollercoaster rally last week, market sentiment seems mixed, unable to determine market directionality as the impact of the virus unfolds.
The truth is that the social and economic impact of the coronavirus epidemic (perhaps now a pandemic?) is still unfolding, its effects multiplicative and indeterminate,
But as with any scenario, good or bad, fortunate or disastrous, there’s always an opportunity somewhere if you can identify and prudently act on it.
Sure, this may seem a bit callous. But the truth is that we must still function on an economic level--whether it’s going to work, purchasing goods, and investing our money--until situations prevent us from doing so.
So, before you reposition your portfolio, here are 5 points to consider.
1 - COVID-19 is a Black Swan Whose Full Economic Impact Has Yet to Be Seen
A proverbial “Black Swan” is an unexpected event whose arrival brings a major, if not disastrous, the effect on a given system.
With regard to COVID-19, the systems under threat span the very fabric of our society, healthcare system, and economic stability. Nobody could have anticipated this.
Just think: at the end of 2019, the US and China had just completed “phase one” of their trade deal. The US-Iran hostilities (remember the drone strikes?) had cooled. And in January, corporate earnings were off to a much stronger start than economists had expected.
We were off to a good and reasonably optimistic start. And then, a rare virus from a “wet market” in Wuhan, China began spreading rapidly. It’s still spreading globally, with new cases of community-based transmission.
Prior to this, gold had already been rising. Add coronavirus to the mix, and the fear trade shifted to high gear. Now with a half-percentage rate cut by the Fed last week (and all of the negative implications that it may have on the dollar), money is pouring even more forcefully into the yellow metal.
And there’s no reason to think that the flight to safety will stop there.
2 - Negative Sovereign Debt Stands at an Astounding $15 Trillion
Investors across the globe seeking safety are rushing into sovereign debt. The problem is that the sovereign debt market has ballooned to the extent that many of the yields are negative. Governments across the globe are now getting paid for borrowing money, instead paying interest to its creditors!
If this sounds like a ridiculous situation, you’re right, it is. And it can’t last for too long before credit defaults begin to emerge (and creditors pull out at a significant loss). Besides, why would you purchase negative-yielding debt as a safe haven, to begin with?
3 - Gold Spills Over to the Mainstream
Over the last year, there were several indicators that the global economy may be on shaky ground. But of course, the investing public didn’t pay much attention to it as the equities bull market had been on a steady and record-breaking trajectory.
COVID-19 exposed the cracks beneath the foundation of the global economy; the “chinks” in the armor. It also exposed the complacency of many investors who didn’t know how to react.
Of course, the smarter investors jumped into US bonds and gold, their performances (all holding up) shown below.
The important thing to observe here is that gold has now entered mainstream consciousness. Investors are realizing (late in the game as usual) that conventional investment approaches aren’t working.
As a gold investor, you were probably aware long ago that the risks under current conditions are systemic--that they can cause massive liquidations across securities. Well, that just started. Its end has yet to be determined.
4 - Fiat Money Will Be Strained Beyond Its Ability to Recover
This is just what happens when an easing monetary policy takes hold. Scientists say that COVID-19 may eventually get absorbed, becoming just another flu strain among many others.
Well, so too will global debt, but that doesn’t end in a season (unlike the flu). It lingers and weakens the very economic foundation of the indebted society. Right now, global debt-to-GDP has exceeded 318%. And when debt expands, it does so exponentially, not incrementally.
Expect larger deficits. Expect the value and purchasing power of fiat money to collapse. This is where gold and silver become critical safe havens. Besides fiat, what else might you have that won’t be negatively affected by the central banks’ monetary fixes? I mean, really think about this.
5 - Silver’s Compelling Upside
Here’s something that hasn’t hit the mainstream: silver. Despite its shortage in supply, investors are waiting, yet again, for everyone to jump in because they want to feel they’re making the right decision. Safety in numbers, but opportunities always missed.
Folks, this isn’t the kind of sharp foresight you need to become a successful investor. Following the investing herd will always make you late.
Right now, the Gold-to-Silver Ratio stands at an astounding 96%!
Even if naysayers were to argue that the “new normal” stands at around 70%, this ratio is still way too high.
And considering silver’s supply conditions--conditions resembling palladium right before its massive surge--it signals that now is the time to purchase more of the metal if you’re looking for outsized returns.
Besides, when currencies begin to tumble in value and purchasing power, most people wouldn’t be able to afford gold. Silver, gold’s second, is still trading at discount levels. It’s affordable to most.
And once the mainstream becomes aware of silver’s supply shortage, its potential for growth, and its necessity as a form of “sound money,” then the metal may be bound for a massive upsurge in price. But of course, you won’t benefit unless you get in early (as we said years ago with regard to both gold and silver...needless to say, we were right).
The Bottom Line
The most promising investment opportunities are often found in the margins, where nobody’s looking and when nobody's looking. As a precious metals investor or enthusiast, you’ve probably been staring at (or acting on) the opportunities presented in the metals for the last three years. The gold and silver bull market may be far from over. Virtually every fundamental aspect of both metals signal “go” if you haven’t already jumped in (and profited) from this still-emerging trend.